Commentary Magazine


Topic: budget deficits

Curbing Deficits While Preserving Security

Those of us who have been warning about the consequences of the excessive budget cuts being forced on the U.S. Armed Forces often hear that such cuts are politically unavoidable–that there is simply no willingness in Washington to either raise taxes or cut entitlement spending. Well at least one major political figure is willing to go where others fear to tread. Rep. Paul Ryan, chairman of the House Budget Committee, has just unveiled a budget blueprint that does the seemingly impossible–it balances the budget within 10 years without tax cuts and while restoring roughly $500 billion in defense cuts that will be forced upon the Pentagon if sequestration remains in effect.

The Washington Post summarizes his plan with a somewhat snarky spin: “Overall, Ryan would cut about $5.1 trillion from projected spending over the next decade, with nearly $3 trillion coming from repealing the health-care law and revamping Medicaid. Still, his proposals fall short of balancing the budget, forcing him to resort to a vague promise of new revenue from ‘economic growth’ to meet his goal of wiping out deficits by 2024.”

Actually it’s a good bet that the kind of budget-cutting, tax-simplifying blueprint Ryan proposes would, if adopted, accelerate economic growth, which is currently anemic. But even if it doesn’t, that’s not a big deal. There’s nothing wrong with running a reasonable budget deficit–just as families go into debt to buy a house, so the government can go into debt to achieve public objectives. The problem today is that the deficit is excessive. Ryan would bring it under control and do so without sacrificing defense spending.

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Those of us who have been warning about the consequences of the excessive budget cuts being forced on the U.S. Armed Forces often hear that such cuts are politically unavoidable–that there is simply no willingness in Washington to either raise taxes or cut entitlement spending. Well at least one major political figure is willing to go where others fear to tread. Rep. Paul Ryan, chairman of the House Budget Committee, has just unveiled a budget blueprint that does the seemingly impossible–it balances the budget within 10 years without tax cuts and while restoring roughly $500 billion in defense cuts that will be forced upon the Pentagon if sequestration remains in effect.

The Washington Post summarizes his plan with a somewhat snarky spin: “Overall, Ryan would cut about $5.1 trillion from projected spending over the next decade, with nearly $3 trillion coming from repealing the health-care law and revamping Medicaid. Still, his proposals fall short of balancing the budget, forcing him to resort to a vague promise of new revenue from ‘economic growth’ to meet his goal of wiping out deficits by 2024.”

Actually it’s a good bet that the kind of budget-cutting, tax-simplifying blueprint Ryan proposes would, if adopted, accelerate economic growth, which is currently anemic. But even if it doesn’t, that’s not a big deal. There’s nothing wrong with running a reasonable budget deficit–just as families go into debt to buy a house, so the government can go into debt to achieve public objectives. The problem today is that the deficit is excessive. Ryan would bring it under control and do so without sacrificing defense spending.

Will his plan be adopted anytime soon? Of course not–not with Democrats in control of the Senate and the White House. But it at least shows what’s possible and it puts Republicans in a good position for future elections. If the party rallies behind the Ryan budget they will of course be accused of wanting to kick grandma to the curb, but such partisan charges ring increasingly hollow. Republicans will be able to counter that they have a serious plan to curb runaway deficits while at the same time preserving our defenses–that, in fact, there is no contradiction between those two goals.

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Alfred E. Neuman, Scarlett O’Hara, and Wilkens Micawber Advise Paul Krugman

Paul Krugman is in a channeling frenzy in today’s column, entitled “The Dwindling Deficit.” His inner Alfred E. Neuman says, ‘What, me worry?”:

The budget deficit isn’t our biggest problem, by a long shot. Furthermore, it’s a problem that is already, to a large degree, solved. The medium-term budget outlook isn’t great, but it’s not terrible either — and the long-term outlook gets much more attention than it should.

Who knew? He argues that economic recovery will raise federal revenues and decrease such costs as unemployment and food stamps. That’s usually true enough, except we’ve been in “recovery” since June 2009 and it hasn’t helped yet. Budget deficits for the last four fiscal years were $1.41 trillion (2009), $1.29 trillion, $1.3 trillion, and $1.08 trillion.

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Paul Krugman is in a channeling frenzy in today’s column, entitled “The Dwindling Deficit.” His inner Alfred E. Neuman says, ‘What, me worry?”:

The budget deficit isn’t our biggest problem, by a long shot. Furthermore, it’s a problem that is already, to a large degree, solved. The medium-term budget outlook isn’t great, but it’s not terrible either — and the long-term outlook gets much more attention than it should.

Who knew? He argues that economic recovery will raise federal revenues and decrease such costs as unemployment and food stamps. That’s usually true enough, except we’ve been in “recovery” since June 2009 and it hasn’t helped yet. Budget deficits for the last four fiscal years were $1.41 trillion (2009), $1.29 trillion, $1.3 trillion, and $1.08 trillion.

The administration shows no sign of pushing activities that would have an immediate positive effect on the economy, such as encouraging new oil and gas production, and many signs that it intends to continue its crony capitalist “investments” in green energy, which have been an expensive bust.

A slew of new regulations on business, and tens of thousands of pages more to come with Obamacare and Dodd Frank, will not speed up the recovery. Neither will higher taxes on capital gains and dividends. And the Fed will have to at some point start reining in the money creation (euphemistically termed quantitative easing) that is currently keeping interest rates historically low. That means the cost of servicing the debt will go up. Each one-percent rise in interest rates that the government has to pay raises annual interest costs $160 billion.

Krugman writes that, “. . . the budget outlook for the next 10 years doesn’t look at all alarming.”  Of course, the budget outlook in 2000 foresaw nothing but budget surpluses for the next ten years.  Krugman explains that, “George W. Bush squandered the Clinton surplus on tax cuts and wars.” (There were no Clinton surpluses, in fact, just phony accounting that called money borrowed from the Social Security Trust Fund income. But let that go.) It was the collapse of the Internet bubble in 2000 and the ensuing recession—which began on Clinton’s watch—that caused the “surpluses” to disappear. As for those tax cuts, they were nothing but a giveaway to the rich until, this year, they suddenly became vital to the middle class.

Most egregiously, he writes with regard to Social Security, “At this point, ‘reform’ proposals are all about things like raising the retirement age or changing the inflation adjustment, moves that would gradually reduce benefits relative to current law. What problem is this supposed to solve?”

Ummmm, perhaps the problem pointed out by the Social Security Administration itself that the system will run out of money in 2037? That’s not an economic projection; it’s a demographic one. All those who will be on Social Security in 2037 are, at least, now in their forties.

But Krugman, like, Scarlett O’Hara, wants to think about that tomorrow: “by moving too soon we might lock in benefit cuts that turn out not to have been necessary. And much the same logic applies to Medicare [now scheduled to go broke by 2024]. So there’s a reasonable argument for leaving the question of how to deal with future problems up to future politicians.”

Like Krugman, Wilkens Micawber, was quite certain that “something will turn up.” At least he was until the police turned up and he was arrested for debt.

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A Few Fiscal Facts

James Glassman, the executive director of the George W. Bush Institute and a Forbes contributor, has written a piece on the facts about budget deficits and how various presidents truly rank.

The inspiration for Glassman’s piece was a comment by former Governor Howard Dean, who was asked what specific policies in the Bush administration he thinks are still being used to explain an unemployment rate of more than eight percent. To which Dean responded, “The biggest ones are the deficits that were run up…. The deficits were enormous.”

All of which caused Glassman to do something that Dean did not: consult the facts in various economic reports. Here is the key paragraph:

As for spending itself, during the George W. Bush years (2001-08), federal outlays averaged 19.6 percent of GDP, a little less than during the Clinton years (1993-2000), at 19.8 percent and far below Reagan, whose outlays never dropped below 21 percent of GDP in any year and averaged 22.4 percent. Even factoring in the TARP year (2009), Bush’s average outlays as a proportion of the economy was 20.3 percent – far below Reagan and only a half-point below Clinton. As for Obama, even excluding 2009, his spending has averaged 24.1 percent of GDP – the highest level for any three years since World War II.

I would only add that under Bush the deficit fell to 1 percent of GDP ($162 billion) by 2007, the penultimate year of the Bush presidency.

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James Glassman, the executive director of the George W. Bush Institute and a Forbes contributor, has written a piece on the facts about budget deficits and how various presidents truly rank.

The inspiration for Glassman’s piece was a comment by former Governor Howard Dean, who was asked what specific policies in the Bush administration he thinks are still being used to explain an unemployment rate of more than eight percent. To which Dean responded, “The biggest ones are the deficits that were run up…. The deficits were enormous.”

All of which caused Glassman to do something that Dean did not: consult the facts in various economic reports. Here is the key paragraph:

As for spending itself, during the George W. Bush years (2001-08), federal outlays averaged 19.6 percent of GDP, a little less than during the Clinton years (1993-2000), at 19.8 percent and far below Reagan, whose outlays never dropped below 21 percent of GDP in any year and averaged 22.4 percent. Even factoring in the TARP year (2009), Bush’s average outlays as a proportion of the economy was 20.3 percent – far below Reagan and only a half-point below Clinton. As for Obama, even excluding 2009, his spending has averaged 24.1 percent of GDP – the highest level for any three years since World War II.

I would only add that under Bush the deficit fell to 1 percent of GDP ($162 billion) by 2007, the penultimate year of the Bush presidency.

As for the financial crisis of 2008, which obviously had a significant effect on the budget deficit, Democrats bear the majority of the blame for blocking reforms that could have mitigated the effects of the housing crisis, which in turn led to the broader financial crisis.

As Stuart Taylor put it  in 2008:

The pretense of many Democrats that this crisis is altogether a Republican creation is simplistic and dangerous. It is simplistic because Democrats have been a big part of the problem, in part by supporting governmental distortions of the marketplace through mortgage giants Fannie Mae and Freddie Mac, whose reckless lending practices necessitated a $200 billion government rescue [in September 2008]. … Fannie and Freddie appear to have played a major role in causing the current crisis, in part because their quasi-governmental status violated basic principles of a healthy free enterprise system by allowing them to privatize profit while socializing risk.

The Bush administration warned as early as April 2001 that Fannie and Freddie were too large and overleveraged and that their failure “could cause strong repercussions in financial markets, affecting federally insured entities and economic activity” well beyond housing. Bush’s plan would have subjected Fannie and Freddie to the kinds of federal regulation that banks, credit unions, and savings and loans have to comply with. In addition, Republican Richard Shelby, then chairman of the Senate Banking Committee, pushed for comprehensive GSE (government-sponsored enterprises) reform in 2005. And who blocked these efforts at reforming Fannie and Freddie? Democrats such as Senator Christopher Dodd and Representative Barney Frank, along with the then-junior senator from Illinois, Barack Obama, who backed Dodd’s threat of a filibuster (Obama was the third-largest recipient of campaign gifts from Fannie and Freddie employees in 2004).

So the current president and his party bear a substantial (though not exclusive) responsibility in creating the economic crisis that Obama himself inherited.

In any event, Jim Glassman has performed a useful public service, if only in deploying (to paraphrase Thomas Huxley) a few fiscal facts to slay a beautiful, if false, deduction.

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